Shaheed Mohamed, Head of Group Savings and Investments at Allan Gray
The upcoming two-pot system is designed to enhance retirement outcomes by ensuring that at least two-thirds of a member’s future retirement savings are preserved until retirement. At the same time, it allows members to access a portion of their savings once per tax year if they encounter financial distress.
Providing some level of access to funds under the new system will help alleviate the extreme measures some members currently take to access their retirement savings during financial crises. We have seen numerous instances where cash-strapped members resign from their employment just to access the funds in their pension or provident funds. This is detrimental because it often leaves them without work for a period as they seek new employment and any assets that are withdrawn and not replaced before retirement will reduce income in retirement. Additionally, this is highly disruptive for employers, who then need to source and train new staff, incurring significant costs.
The new two-pot system should help prevent these scenarios, benefiting members, employers, and the overall retirement savings rate in South Africa over the long term. While the ability to access funds in emergencies will provide relief to some members, the long-term success of the new system relies on most members refraining from unnecessary withdrawals.
How will it work?
Starting 1 September 2024, new contributions to provident, pension, umbrella, retirement annuity and preservation funds will be divided into two components (i.e., the two “pots”). One-third of new contributions will go into a savings component, accessible before retirement in case of emergencies. The remaining two-thirds will go into a retirement component, which will be inaccessible until retirement and must be used to purchase a retirement income product.
Members will retain their existing retirement rights on all contributions made before 1 September and growth thereon. The value of a member’s current retirement fund as of the end of August 2024 will remain invested and be allocated to what will be called the “vested” component. All existing rights will continue to apply to this component. Additionally, 10% of the vested component, up to a maximum of R30 000, will be transferred from the vested component to “seed” the member’s savings pot on 1 September. Seeding is a once-off event.
What are the implications of withdrawing from the savings component?
While the two-pot system offers relief for members facing financial hardship, there are real consequences of withdrawals. Withdrawing from the savings component diminishes the full benefit of compounding. Accessing any part of the savings component before retirement will reduce the amount available at retirement for purchasing a retirement income product or to take as a cash lump sum. Additionally, withdrawals before retirement will be taxed at the member’s marginal tax rate, which can push them into a higher tax bracket. Outstanding taxes due to SARS will also be deducted. It is important for members to understand that their product provider will pay the after-tax amount into their account, so they are likely to receive a lower amount that they requested.
What is the role of the employer?
Responsibility for staff retirement fund benefits often resides within the finance and/or human resources functions, with department heads typically being key decision-makers. Employers must prepare their staff for the new two-pot system. As custodians of staff’s retirement fund benefits, it is crucial for employers to educate their staff about the workings and implications of the new system. Management should involve the retirement fund consultant or product provider to inform their members about the pros and cons of the new system, especially the implications of withdrawing from the savings component. This ensures members make well-informed decisions regarding their retirement goals.
Employers should also understand the withdrawal process with the product provider, as they could face a surge of withdrawal requests from staff come 1 September. At Allan Gray, our approach has been to alleviate the administrative burden on employers by guiding members to submit withdrawal instructions via their secure online account. This not only simplifies the process for employers, but also helps mitigate fraudulent activity, which is more common with paper-based instructions. With the anticipated rise in withdrawal activity, there is an increased risk of fraudsters targeting unsuspecting members. Employers should inform their staff to be extremely vigilant in order to safeguard their funds.
It is important for employers to understand and communicate any additional fees under the new two-pot system, as some retirement providers will levy an implementation fee and/or a withdrawal fee.
With over two decades of experience processing retirement fund withdrawals and member claims, we are prepared for these changes. Despite the additional costs incurred to get our systems ready for 1 September and to process withdrawals thereafter, we have decided not to charge an implementation fee nor a member withdrawal fee on our Umbrella Retirement funds at the outset – we will monitor activity for a period and make decisions based on data and experience.
Please joins us at our retirement benefits conference
To discover more about the new two-pot system and other retirement industry matters, please join our free, annual virtual seminar on the mornings of 10 and 11 September. This year, we shine the spotlight on the importance of reviewing, reshaping and reforming the retirement fund industry in South Africa to promote better outcomes for more retirement savers. For more information and to register for the event, please click here.
ENDS
